Americans have a median of $5,200 in their savings accounts with an average of $33,766.49.

The $33,766.49 number may sound unrealistic to you. Unfortunately, unless you’re over 60 years old and make over $115,000 annually, it probably is unachievable.

Our trouble saving means its difficult to make big purchases: homes, cars, college or school bills, and all the other expenses that come with huge price tags.

While loans are a lifesaver in many cases, you only benefit from them when you can afford the monthly payments.

The estimated monthly payment (EMI) makes or breaks your ability to qualify and receive your loan as well as stay current.

Do you know how much you can or should borrow? How does the proposed interest rate impact that payment? Keep reading to find out how to calculate EMI and find a loan with affordable monthly payments.

## What Is EMI?

The acronym EMI refers to the “equated monthly payment” of a loan. The EMI is the balance you pay to your lender on the same day every month.

Banks don’t randomly assign an EMI. The figure offers a number that allows you to pay off both the principal balance and the interest over the term of your loan. When you make the mandated amount of payments, your loan is then paid off.

## How to Calculate EMI

Calculating your EMI before agreeing to a loan is important because you’re not just paying back the principal balance you borrowed. Banks wrap up processing fees and interest into your product, which impact your monthly payment.

Here’s an example:

You want a $10,000 loan to pay back over five years. The $10,000 is the principal balance. If you made the same payment every month for 60 months (five years), then your monthly payment would be $166.66 per month for five years.

Unfortunately, the loan you received wasn’t free. Your bank assigned a 10.25% interest rate to the balance.

In this case, the interest alone escalates your payment from $166.66 per month to $213.70 per month. Over the course of the loan, you paid back more than the $10,000 borrowed. You also paid an additional $2,822.16 in interest.

Your payment jumped by nearly 78% just by adding interest.

So how do you calculate your own EMI?

You use an EMI formula.

### The EMI Formula

The EMI requires three figures:

- principal loan amount
- interest rate
- loan tenure

The full equation is:

E= P*r* (1+r)^n/([(1+r)^n]-1)

In this equation, P stands for the principal loan amount, r stands for interest rate, and n is the loan tenure.

To calculate E – your EMI – enter the figures provided in your bank quote in the appropriate places.

## How to Lower Your Total Repayment Schedule

The EMI is a simple calculation used by your bank to create a set monthly payment. With an EMI, you know what to expect every month, and the bank makes money.

Is there a way to lower your EMI?

Once you’ve agreed to the terms and conditions of your loan, the EMI remains the same until the end of your loan term. The only way to alter your EMI is to change one of the factors in the equation either the:

- principal loan amount
- loan interest rate
- loan tenure

Here’s what you need to know to achieve a lower monthly payment.

### Borrow Less

Worried about how to afford the monthly payment on a loan? Lower your EMI by borrowing less.

It seems like common sense. After all, shouldn’t your bank stop you from borrowing an amount you can’t afford?

Often, banks do limit your borrowing ability. They do so by using your credit history and employment history to decide how much they’ll lend you. But they don’t know how you spend the rest of your money.

You might spend a significant amount of your monthly income on rent, food, or insurance costs. Because it’s not debt, your bank won’t necessarily hold those expenses against you.

Factor your potential EMI into your current budget and decide whether you need the full principal amount before you borrow.

### Hold Out for a Lower Interest Rate

Lenders are free to determine what interest rates they offer. They make decisions based on competition from other banks and market level interest rates set by the government.

Other personal factors also come into play: banks offer lower interest rates to customers with excellent credit and a healthy relationship with the bank. The loan balance also comes into play.

As you saw in the example above, the interest rate makes a huge difference in the affordability of an EMI. A high interest rate may add nearly 75% onto your principal payment.

If your interest rate seems less then favorable, consider shopping around for a better APR. If your credit score or bank relationship is holding you back, ask whether it’s possible to wait for your loan.

In the example provided earlier, the interest rate offered was 10.25%. It sent the total payment up from $166 to $213. Waiting for a lower rate of even 7% drops your payment below $200 and saves nearly $500 on interest over time.

### Change Your Loan Term

Small principal balances come with short loan terms. The benefit of a brief loan terms means paying less interest, but it also comes with higher payments.

By extending your loan term, you’ll lower your EMI significantly. Although the total number of payments and the amount of interest paid jumps, it may make a loan more affordable.

The $10,000 loan with a 7% interest rate paid over five years features an EMI of $198. If you choose the same loan with an eight-year term, your payments drop to $136.34 per month.

Your loan term should be the last factor you consider changing because lower principals and interest rates amount to real savings. A longer loan term keeps more money in your pocket now. Unfortunately, it also sends your interest bill skywards over the long run.

## Do the Math Before You Sign the Dotted Line

Knowing how to calculate EMI will save you time and grief when you’re shopping for a loan. Not only will you go in knowing what’s affordable, but you’ll know what to look for in a good loan.

Remember, it’s easier to negotiate favorable terms before you sign up for the loan than it is when you’re struggling to make payments.

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